Oil Firms Wary Of US Drilling

Wildcatters duck risk of drop in oil prices

ENERGY companies are being very choosy about where they put the extra dollars that their oil has been bringing since August. Low on their list is additional exploration in the United States; in fact, it may even be curtailed. ``What I have been hearing is that a number of deals are being pulled back because of the uncertainty'' in the Middle East, says Jack Ekstrom, director of industry affairs at Petroleum Information in Denver. Mr. Ekstrom has talked to numerous oilmen at recent energy conventions.

His anecdotal evidence is borne out by a leading indicator of US exploration activity. The number of permits to drill sought by oil companies declined 18 percent last month compared to August. Oilmen remember investing heavily in exploration in 1981, the last time oil reached $40 a barrel. Then prices collapsed in 1982 and again in 1986 to below $10 a barrel, devastating the industry.

Worrisome scenario

The scenario that now gives wildcatters the jitters involves a sudden Middle East settlement, followed by resumed production from Kuwait and Iraq as well as continued production from the sources that were developed to replace their output. That would put an unneeded 4 million barrels a day on the market.

The Middle East crisis is less likely to impair plans made by major oil companies than those made by the thousands of smaller ``independents,'' who rely more on outside financing. These companies spend 70 percent of the exploration dollars in the US and drill 90 percent of the wells, Ekstrom says.

Several major companies have announced plans this year to step up exploration. ``Unfortunately, a lot of that is going overseas,'' says Joe Lastelic, an American Petroleum Institute spokesman.

One reason is that some of the areas in the US that interest oil companies most are off limits. Two weeks ago the House Appropriations Committee voted to continue and expand moratoria on exploration in some offshore areas for environmental reasons. ``The Kuwaiti crisis made no difference at all to their attitude,'' Mr. Lastelic says.

The decline in permits to drill is especially striking because right until the Kuwait crisis, exploration in the US had been increasing comfortably: wells completed, up 10.9 percent versus 1989; wells started, up nearly 20 percent; rigs working, up 19 percent.

If a resolution to the Gulf crisis does glut the market, ``there would be an immediate drop in prices, probably below what it was when this happened,'' Ekstrom says. ``If you knew the price would go back to $19, you'd have no problem. But you could be looking at 12 to 13 bucks a barrel. Nobody wants to invest with that possibility out there.''

Adds Lastelic: ``It may be slightly encouraging to see $40 oil, but what will prices be years from now when you go into production? Oil prices do go up and down. You don't make multimillion-dollar decisions based on a price of a relatively few days.'' Exploration projects take ``three, five, seven years'' to bear fruit, he says.

Just where oil prices will settle after the crisis ends is the subject of much debate. At an oil conference in London last week, former Saudi oil minister Zaki Yamani predicted a price below $15; other analysts see a price above $20. But they agree that it won't stay where it is.

``I don't know of anyone in the business who thinks this will last,'' Ekstrom says.

Another factor that restrains exploration is that 43 percent of wildcats are drilled in search of natural gas. Prices for gas are still very low relative to oil, Ekstrom says. Except for October, each month of 1990 has seen a lower natural gas price than in the corresponding month last year.

Existing wells a priority

So where are the petrodollars going? Into production, for one thing. An investment there can be recovered more quickly than spending on exploration.

Ike Kerridge, who tracks the rig count for Houston drill-bit manufacturer Baker Hughes, points to the number of workover rigs in use, which jumped 9 percent in September over August. Workover rigs are used to maintain existing wells and increase their production, an activity that ``gets postponed when prices are low,'' Kerridge says. A well workover costs about $30,000.

Oilmen are also using the Kuwaiti crisis windfall to pay off debts accumulated during the lean 1980s. Says Ekstrom: ``I'm sure the banks appreciate it.''

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